The Corporations Act provides that undischarged bankrupts or those who have entered into personal insolvency agreements under Part X of the Bankruptcy Act (whether in Australia or another country) cannot act as a director of, or take part in the management of, a company.
Court can grant leave
The Court can however grant leave to an undischarged bankrupt to take part in management of a company and such leave can be granted either with or without conditions. Australian Securities and Investments Commission must be notified of any such application (so ASIC can intervene if required).
The applicant will bear the onus of establishing that the Court should make an exception to the legislative policy behind the prohibition (to protect the public). The court will not easily be convinced that the usual prohibition should not apply and will exercise its discretion with a view to balancing the considerations relevant to the bankrupt and the underlying public policy.
Leave will not be granted where the disqualification was imposed by ASIC (as opposed to an automatic disqualification due to the operation of the Corporations Act).
What is considered?
Hardship to the proposed director is not of itself a persuasive ground for the granting of leave however, it is one of many factors which may be considered by the court in exercising its discretion including the reason for the disqualification, the nature of the bankrupt’s involvement, the general character and conduct of the applicant in the intervening period since being removed from or prevented from being in office, the structure of the company, its business and the interests of shareholders, creditors and employees.
Although such applications are not commonplace, an undischarged bankrupt may be granted leave to take part in the management of companies generally or, more frequently, in the management of a particular company.
The disqualification imposed by the Act continues despite the Court granting leave and care must be taken to ensure that any conditions on the leave are complied with as failure to do so can result in the leave being revoked and an offence then being committed and the penalty can include a significant 50 penalty unit fine and/or imprisonment for 12 months.
Bankruptcies generally last 3 years. You can check if someone is an undischarged bankrupt by checking the Australian Financial Security Authority’s Bankruptcy Register
For further information in relation to bankruptcy, insolvency or company matters, please contact McKillop Legal on (02) 9521 2455 or email email@example.com
This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.